Cooking Upscale Tasty Gains

 | Jun 06, 2013 | 1:00 PM EDT
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A relatively small restaurant chain caught my attention recently and from the looks of things, BJ's Restaurants (BJRI) could be set to serve some tasty gains in the next one to three years.

Shares are currently trading at $37, off from a high of $45 and currently trade for 34x trailing earnings. I'd like to see the shares dip below $30 to really get my attention, but one has to avoid anchoring on metrics like the price-to-earnings ratio to appreciate the opportunity.  

BJ's owns and operates 130 upscale casual brewhouse-style restaurants throughout the U.S. The concept is a little like the Cheesecake Factory (CAKE) with an upscale style bar that showcases high quality craft beers and other quality beverages. It's a great spot for a family dinner, works well for a guys' night out, as a place for couples to enjoy a night out or as a place for working professionals to retire after the day. I highly recommend anyone interested in this idea to visit the company's website and check out the most recent investor presentation.

With 130 locations, the company plans to continue an expansion strategy and sees a long-term potential for over 400 locations. Fiscal 2012 revenues came in just over $700 million along with net income of $31 million -- up from $513 million and $23 million in 2010, respectively. BJ's has a pristine balance sheet with no debt and equity of $372 million.  

The company hopes to increase store count by as many as 16 restaurants this year, which could add as much as $60 to $70 million in sales and $2 to $3 million in profit in 2013. An untapped $75 million line of credit ensures that the company will have no problems pursuing its expansion plans over the next several years.  

BJ's readily acknowledges the casual dining segment is the most competitive area of the restaurant industry. Overall segment growth is likely to slow but the overall segment generates over $100 billion in annual sales. With $700 million in annual sales, BJ's is focusing on growing its share of the existing pie.

The key is differentiation but more importantly, BJ's is nowhere near being a mature concept that is getting boring. Today's current professional working class and young couples appreciate better quality food products -- craft beers, wines, fresher foods -- and they are clearly willing to pay a little more for that experience.  

What I like most about the restaurant industry is that hundreds of millions of people are eating two to three times a day, every day. That's a trend that is not going anywhere. The key for restaurants, of course is to provide great service and a great experience at a price that is deemed attractive for the perceived benefit. BJ's Restaurant is a small, yet growing, concept in a stable industry that could quickly become a fan favorite.

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